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Working Paper Series no. 513: False News, Informational Efficiency, and Price Reversals

Abstract

Speculators can discover whether a signal is true or false by processing it but this takes time. Hence they face a trade-off between trading fast on a signal (i.e., before processing it), at the risk of trading on a false news, or trading after processing the signal, at the risk that prices already reflect their information. The number of speculators who choose to trade fast increases with news reliability and decreases with the cost of fast trading technologies. We derive testable implications for the effects of these variables on (i) the value of information, (ii) patterns in returns and trades, (iii) the frequency of price reversals in a stock, and (iv) informational efficiency. Cheaper fast trading technologies simultaneously raise informational efficiency and the frequency of ``mini-flash crashes": large price movements that revert quickly.

Jérôme Dugast and Thierry Foucault
October 2014

Classification JEL : G10, G12, G14

Keywords : news, high-frequency trading, price reversals, informational efficiency, mini-flash crashes

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publication
Working Paper Series no. 513: False News, Informational Efficiency, and Price Reversals
  • Published on 10/01/2014
  • EN
  • PDF (826.84 KB)
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Updated on: 06/12/2018 11:00